A Roadmap for Renewable Energy in the Middle East and North Africa

Transcription

1 January 2014 A Roadmap for Renewable Energy in the Middle East and North Africa Laura El-Katiri OIES PAPER: MEP 6

2 The contents of this paper are the authors sole responsibility. They do not necessarily represent the views of the Oxford Institute for Energy Studies or any of its members. Copyright 2014 Oxford Institute for Energy Studies (Registered Charity, No ) This publication may be reproduced in part for educational or non-profit purposes without special permission from the copyright holder, provided acknowledgment of the source is made. No use of this publication may be made for resale or for any other commercial purpose whatsoever without prior permission in writing from the Oxford Institute for Energy Studies. ISBN ii

3 Abstract Home to more than half of the world s crude oil and more than a third of its natural gas reserves, the MENA region has, for the past fifty years, gained enormous significance as a global producer and exporter of energy. The MENA region is already a major energy consumer, and is forecast to continue to account, alongside Asia, for the majority of the world s energy demand growth well into the 2030s; placing domestic energy policies at the heart of the region s economic agendas for the coming decades. This paper argues that renewable energy most importantly solar power, with its particular regional climatic advantage could play a significant role as a cost-competitive alternative to conventional fossil fuels, if the full opportunity cost of domestically consumed oil and natural gas resources is fully priced into the regional energy system. The absence of cost-reflective energy and electricity tariffs in the MENA region today currently conceals this potential cost advantage; and leaves renewable energy deployment subject to further, economically distorting, policies such as renewables targets and fiscal incentives. Systematically opening up the economic opportunities offered by renewable energy to the MENA region will hence require structural reform of regional energy market and pricing mechanisms, thereby rationalizing the use of different energy sources in each domestic market. January 2014: A Roadmap for Renewable Energy in the Middle East and North Africa iii

4 Acknowledgements The author would like to express her special thanks to Bassam Fattouh, Robin Mills, David Robinson, Malcolm Keay, Mari Luomi, and Abdulrahman Al-Ghabban for their helpful comments on earlier drafts of this paper. Many thanks also to the Arab Union of Electricity Producers for kindly providing some of the underlying data for this research; and the Israeli Public Utility Authority for providing data on Israel and the Palestinian Territories. All remaining errors are the sole responsibility of the author. January 2014: A Roadmap for Renewable Energy in the Middle East and North Africa iv

5 Contents Abstract... iii Acknowledgements... iv Contents... v Figures... v List of Abbreviations... vi 1. Introduction The MENA Region s Changing Energy Landscape Growing regional consumption of fossil fuels The rising economic cost of business-as-usual Environmental costs Barriers to Renewables Deployment in the MENA Electricity pricing in the MENA region Domestic pricing of fossil fuels Promoting Renewables in the MENA Region The economics of the first best: market incentives Energy market liberalization (i): Reforming domestic energy prices Energy market liberalization (ii): Bringing in the private sector The economics of the second best: fiscal and regulatory incentives Regulatory incentives: Renewable energy targets Fiscal incentives: carbon taxes, tax benefits, feed-in tariffs Integrating renewable energy within national energy strategies Exporting renewable energy to the Middle East and Europe Making use of green growth opportunities Institution-building and research Renewable energy and rural electrification Conclusion Bibliography Appendix I: Basic Considerations when Estimating the Cost of Renewable Energy in the MENA High initial capital costs Comparison of costs on a lifecycle basis Need for specialized financial products Difficulty of credit access Transaction costs Integrating intermittent energy Positive and negative externalities: costs unaccounted for Appendix II: Renewable Technologies and their Application in the MENA Figures Figure 1: Regional Trends in Energy Use, Compound Average Annual Growth, Figure 2: Regional Trend in Energy Intensity, Compound Average Annual Growth in Energy Use, Figure 3: Share of Fuel Types in Total Electricity Generation by World Region, Figure 4: Per Capita CO 2 Emissions by Region, Figure 5: Regional Trend in CO 2 Emissions Growth, *... 7 Figure 6: Cross-Country Comparison of Average Residential Electricity Prices in Selected MENA and non-mena Countries, Figure 7: Residential, Commercial, and Industrial Electricity Prices in Selected MENA Countries, Figure 8: Trends in Renewable Energy Investment in the MENA Region, January 2014: A Roadmap for Renewable Energy in the Middle East and North Africa v

6 List of Abbreviations CO 2 Carbon Dioxide CSP Concentrated Solar Power ECRA Saudi Arabia s Electricity and Co-generation Regulatory Authority EIA U.S. Energy Information Administration ESIA Emirates Solar Industry Association FIT Feed-in tariff GCC Gulf Cooperation Council GDP Gross Domestic Product IEA International Energy Agency IRENA International Renewable Energy Agency LCOE Levelized Cost of Energy LRMC Long-Run Marginal Cost MENA Middle East and North Africa NEC Net Energy Exporting Countries NIC Net Energy Importing Countries OECD Organisation for Economic Cooperation and Development OPEC Organization of Petroleum Exporting Countries PERG Programme d Électrification Rurale Global PV (Solar) Photovoltaic RES Renewable Energy Sources UAE United Arab Emirates UNFCCC United Nations Framework Convention on Climate Change US US Dollar Cent US$ US Dollar January 2014: A Roadmap for Renewable Energy in the Middle East and North Africa vi

7 1. Introduction The sun will be the fuel of the future Anonymous, 1876, Popular Science 1 The Middle East and North Africa (MENA) has, for most of its modern-day history, been known for its energy wealth. 2 Home to more than half of the world s proven crude oil and more than a third of its natural gas reserves, the dominant story of the MENA region has for the past fifty years been that of a global energy supplier. 3 Consequently, the MENA region s domestic energy market has been seen for decades as marginal in the global picture, supplied with amply available, regionally produced, lowcost fossil fuels. With some of the world s lowest domestic prices for both primary energy and electricity, the MENA region has appeared to lack the kind of economic incentive needed for alternative energy sources, such as renewable energy and nuclear power, to enter its markets. The perceived abundance of low-cost energy supplied by fossil fuels has undoubtedly fuelled the region s domestic energy demand growth, having spurred both extensive energy-intensive industrialization programmes and the rapid rise in living standards experienced by some of the region s oil exporters in particular the economies of the Gulf Cooperation Council (GCC). Forecast to stand alongside Asia in accounting for the majority of incremental global primary energy demand growth well into the 2030s, the MENA region is a rapidly growing energy consumer. 4 But the rise in regional energy consumption comes at considerable economic cost: rising prices for oil on world markets since the early 2000s have raised the cost of imported oil and oil products for MENA net energy importing countries (NICs), while many oil and gas producers (net energy exporting countries, or NECs) divert growing shares of their oil and natural gas production away from high-price international markets, to supply domestic demand at growing opportunity cost. 5 In this paper, we argue that renewable energy options such as wind and solar energy, overlooked for decades owing to missing commercial incentives, could offer the region a valuable energy alternative to fossil fuels in power generation. This would save MENA economies not only rising import costs for oil in electricity use, but also free valuable crude oil resources for export by the region s hydrocarbon producers. The MENA region s almost unrivalled climatic advantages (particularly in solar energy 6 ), together with its high level of reliance on oil for power generation, may indeed render some renewable energy technologies cost-competitive to conventional fossil fuels, provided the full opportunity cost of alternative fuels is taken into account. Under these assumptions, the MENA region could indeed do without the type of renewable energy subsidies needed in other, more developed, renewable energy markets in order to incentivize market uptake. The case is considerably stronger for renewables substituting for oil than for natural gas, although the price advantage of renewables over gas rises 1 Quoted in IEA (2011c, 4). 2 In this paper, the Middle East and North Africa region includes Algeria, Bahrain, Egypt, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Libya, Morocco, Oman, Palestine (where data is available), Qatar, Saudi Arabia, Syria, Tunisia, United Arab Emirates (UAE), and Yemen. Regional data for the MENA region based on World Bank aggregates include Malta and Djibouti unless otherwise stated. 3 Data as of end-2012, BP (2013). 4 E.g. IEA (2012b, 57). 5 Some simulations of Saudi Arabia s domestic oil demand, for instance, such as those conducted by Chatham House and Citibank, show the potential for Saudi Arabia under a business-as-usual scenario to exhaust its own domestic reserve base in just 15 to 20 years, turning itself ultimately into a net importer of oil unless alternative policy options are pursued. Lahn and Stevens (2011); Bloomberg (2012). 6 Reasons include the MENA region s overall high level of insulation, coupled with high irradiation levels and land availability, as well as statistically many sun hours per year, and reliably low precipitation risk during the summer months, particularly on the Arabian Peninsula. Morocco is also believed to host some of the best wind sites in the world. DLR (2005); OECD (2013); IRENA (2013b). Separate studies are available for a variety of MENA countries, including Egypt, Morocco, Algeria, Iraq, Iran, and Saudi Arabia. See Karakosta and Psarras (2013); Stambouli (2011); Vidican (2012); Razavi (2012); Pejat et al. (2013); Dehghan (2011); Kazem and Chaichan (2012); Al-Saleh et al. (2008); Saudi Arabia Solar Industry Association (2013). 1

8 along with a higher share of non-pipeline gas imports. Raising the share of renewable energy in the MENA region would also result in significant environmental, and thereby wider social, benefits although current pricing mechanisms inside and outside MENA countries do not yet reflect these benefits as part of the pricing of renewables-based energy generation they hence remain a positive externality, rather than a factor driving down costs. Key to understanding and fully exploring the potential economic value of key renewable energy technologies, however, requires a reconsideration of the MENA region s domestic pricing frameworks, and a restructuring of regional energy markets to free up the cost advantages that renewable energy sources may provide. Current tariff systems do not reflect economic costs such as the import cost paid via budgetary transfers rather than by utilities or final consumers (energy subsidies) or the opportunity cost incurred by producers. The absence of cost-reflective energy and electricity tariffs in the MENA region today currently conceals this potential cost advantage, leaving renewable energy deployment subject to further economically distorting policies such as pre-determined renewables targets and vague notions of green job creation opportunities. In order to make use of the real economic opportunities potentially offered by renewable energy, the MENA region will require a structural reform of domestic energy market pricing. This, however, could take the form of an alternative policy framework that encourages the deployment of renewables via fiscal and regulatory incentives. Other incentives may include the exploitation of positive externalities of renewables in the regional context by using solar and wind technologies for rural electrification projects, displacing expensive fuels such as diesel, and exporting electricity abroad. However, caution must be applied to expectations that see renewable energy as a saviour-for-all, for example, that it could be a driver for local manufacturing industries and green job creation. The paper proceeds as follows: - Section 2 introduces the context for the MENA region s changing energy landscape that may create an economic opportunity for renewable energy on a cost-competitive basis; - Section 3 examines those factors that have so far prevented a greater share of renewable energy sources (RES) deployment in the MENA region, principally energy pricing; and - Section 4 suggests policy options which the MENA economies could follow to capitalize on their renewable energy resources. - Section 5 presents the conclusions. 2. The MENA Region s Changing Energy Landscape The MENA region s domestic energy landscape has undergone tremendous change throughout the region s modern-day history. This section summarizes the main factors that account for the region s shift from being a mere producer to becoming a main demand growth market for energy, together with the economic reasons why MENA economies would reasonably want to consider renewable energy sources, in light of the region s historical, overwhelming reliance on fossil fuels and its presumable cost advantage in these energy sources. We suggest two main factors that have played a significant role in shifting regional energy priorities: (i) (ii) the surge in regional energy demand across MENA economies, and its implication on the export capacity of the region s producing countries; and the rising economic cost of surging domestic energy demand in both net energy exporting countries (NECs) and net energy importing countries (NICs) as a result of rising oil prices since the early 2000s and the region s continued reliance on oil for a large share of its domestic energy supply. We also discuss a third, related aspect, one whose economic weight is less easily quantifiable: (iii) the environmental consequences of continued use of fossil fuels for virtually all of the region s energy needs. January 2014: A Roadmap for Renewable Energy in the Middle East and North Africa 2

9 2.1. Growing regional consumption of fossil fuels The MENA region has historically been a peripheral demand market for energy; the consequence of its initially low levels of industrialization (up to as late as the 1960s), its relatively small population in comparison with other world regions (including North America, Europe, and emerging South and East Asia), and hence the limited size of its domestic market overall. 7 However, the MENA economies energy consumption has historically grown faster than most other regions demand, peaking during the 1970s (a decade of vast energy-intensive expansion in the region s oil producers in particular). Since then, regional energy demand has continued to grow at high rates each decade, and although decelerating to its current level of above 2 per cent more recently, the MENA region is now second only to the fast-growing economies of South and East Asia (see Figures 1 and 2). Many large oil producing countries, particularly the Gulf states, have grown considerably faster than the regional average, both in absolute and in per capita terms. 8 Aggregate Gulf demand, (including the GCC economies, Iran, and Iraq) for primary energy has risen five-fold since the 1980s, translating into the world s fastest energy demand growth for any region if disaggregated from overall MENA demand. 9 Figure 1: Regional Trends in Energy Use, Compound Average Annual Growth, Figure 2: Regional Trend in Energy Intensity, Compound Average Annual Growth in Energy Use, Source: World Bank (2013a). The key regional producers Saudi Arabia and Iran are now also major energy consumers. Over just a few years, Saudi Arabia has risen to be the world s sixth largest consumer of oil and natural gas; while Iran has been in the unique position of simultaneously holding the world s largest gas reserves while being both a net importer of natural gas to compensate for domestic production shortfalls and the world s third largest natural gas market after the USA and Russia. 10 With expectations for continuingly rising living standards and large industrial investment programmes across many MENA oil and gas producers, the region s energy needs are forecast to continue to grow. OECD statistics suggest MENA aggregate energy demand is expected to continue to expand 7 For a detailed historical data analysis of the Gulf states (the GCC, Iran, and Iraq), see El-Katiri (2013b, 2 7, 25). 8 World Bank (2013a). 9 El-Katiri (2013b, 6). 10 Data as of end-2012, BP (2013). Saudi Arabia s oil consumption is, at 2.9 mb/d in 2012, only a little less than the world s fifth largest consumer, Russia (3.17 mb/d), and the fourth largest consumer, India (3.65 mb/d). Iran s natural gas consumption in 2012 amounted to some 156 bcm, growing 11.7% from the previous year, which makes Iran third in natural gas consumption to the USA and Russia. Iran s status as an oil and gas exporter at the time of writing is under question owing, additionally, to international sanctions, which overshadow domestic energy policies as the main factor determining the country s export potential for the time being. January 2014: A Roadmap for Renewable Energy in the Middle East and North Africa 3

10 well above the world average, at around 3 per cent per year between 2010 and 2030, with electricity demand growing at a rate of 6 per cent a year over the same period. 11 Fossil fuels continue to supply the majority of the MENA region s primary energy needs, around 98 per cent of the region s energy mix a historical pattern closely tied to the region s role as a global supplier of oil and natural gas since the 1950s. Other than oil and natural gas, only coal has an additional market share, albeit restricted to Morocco and Israel; 12 while hydro-power accounts for the majority of the region s overall small share (a mere 2 per cent of gross regional primary energy consumption) of renewable energy (see Figure 3). Similarly, nuclear power has not yet made inroads into the region with the exception of Iran s small but politically controversial nuclear programme. 13 Figure 3: Share of Fuel Types in Total Electricity Generation by World Region, 2010 Notes: Percentages for Latin America and sub-saharan Africa do not add up, reflecting existing limitations under regional data reporting. The balance is probably made up of traditional biomass. 14 Source: World Bank (2013a) The rising economic cost of business-as-usual For many MENA economies, the security of energy supply question that is, the provision of secure supply of energy at affordable prices 15 has historically not been a major area of policy concern. Supplies came from either domestic production or, in the cases of NICs such as Morocco, Jordan, and Lebanon, preferential contracts with other Arab countries, which limited the risk of any supply disruption. 16 On the other hand, the affordability of energy to domestic MENA economies has historically been safeguarded by domestic government transfers. Such transfers are either explicit, in the form of energy subsidies in NICs, or implicit, via government-regulated domestic prices for oil and gas, as well as electricity, in NECs. 11 OECD (2013, 10). 12 World Bank (2013a). Dubai has, on several previous occasions, announced plans for a coal-fired power plant. Plans for a similar project in Oman have been abandoned due to local residential opposition and environmental concerns. Reuters (2013). 13 The UAE has the most advanced nuclear power plans in the Arab world so far, having contracted four 1,400 MW nuclear reactors to be built by Saudi Arabia, Egypt, and Jordan have also announced nuclear plans at different times in the past. See Rogner and Shihan-Eldin (2013). 14 Like all data used in this report, such data should be considered as indicative, rather than authoritative, given the difficulty in data in reporting across various regions and countries. 15 For instance, Yergin (2006). 16 Some of these contracts have been renewed, although at far higher price levels than during the 1990s, reflecting higher overall oil prices on global markets. For instance, see Al-Ghadd (2011); Ar-Ra ii (2013). January 2014: A Roadmap for Renewable Energy in the Middle East and North Africa 4

11 Since the early 2000s, rising global oil prices have significantly transformed the environment in which these historical economic deals between governments and their citizens have been conducted. MENA oil and natural gas exporters see this impact mainly implicitly: rising domestic demand for domestically produced oil and gas ties a growing share of their production capacity to their priceregulated domestic markets, and impacts their capacity to export their fossil fuels to high-price external markets instead. 17 The resulting opportunity cost of domestic fossil fuel consumption in large oil and gas producers can be substantial, as the case of Saudi Arabia illustrates Saudi Arabia s domestic energy consumption has grown fast over the past thirty years, leading the aggregate Middle East demand (itself one of the key regions expected to drive global demand growth well into the 2030s). 18 Alongside Iran, Saudi Arabia is now the Middle East s largest energy consumer, accounting for a total of 3.5 million barrels of oil equivalent per day (boed) in Saudi Arabia s growing energy demand is seen in its rapidly rising industrial energy intensity and in its energy consumption per capita both place Saudi Arabia firmly amongst the highly industrialized nations. The surge in Saudi Arabia s domestic oil consumption over recent years has prompted concern, both within Saudi Arabia and amongst oil market observers abroad, as to the long-term outlook for domestic oil consumption inside the Kingdom, given the crucial role Saudi Arabian oil exports play on global oil markets. 20 Saudi Arabia s own market size means the Kingdom is now the world s sixth largest consumer of oil in its own right. Saudi Aramco CEO Khaled Al-Falih has rung alarm bells, highlighting the possibility that a business-as-usual scenario in the Kingdom could result in its domestic consumption more than doubling (to 8.2 million boe/d, around two-thirds of the barrel equivalent of Saudi Arabia s export capacity in 2012) by 2030, in the absence of curbs on domestic demand for oil. 21 Saudi investment company JADWA describes the potential for additional revenues to the Saudi fiscal system through a reallocation of domestically consumed crude towards export markets in the following way: Potential impacts on the global price of oil aside, if all of the 2.4 million barrels per day consumed domestically in 2010 [that] were priced at $10 per barrel for local consumers (more than what the electricity company and industrial consumers pay but less than our estimate for gasoline retailers), were instead exported, this would have generated additional oil revenue of around $60 billion, on top of the $215 billion received in oil export earnings. 22 Economic losses incurred by rising fossil fuel consumption in the MENA region are also visible in net importing countries (NICs). Lebanon, Jordan, Morocco, and Tunisia have, for a long time relied, on what were often preferential oil supply contracts with allied Arab states such as Saudi Arabia and Iraq, but the gradual erosion of such contracts, together with the increased need to pay for oil supplies at prices based on international price benchmarks, has increasingly raised the cost of their energy imports. 23 Both under old and new import contracts, the governments of NICs only recovered a fraction of the actual import cost from domestic energy users, who throughout the region have benefited from extensive subsidies on all types of energy, including transport fuel, household gas, and electricity, as well as on the fuel and electricity supplied to industrial users. Typically reliant on fossil fuels for up to 100 per cent of their domestic primary energy supply, the MENA region s NICs face enormous fiscal costs associated with fossil fuel imports that already now 17 For a detailed discussion of the concept, see Fattouh and El-Katiri (2012a). 18 IEA (2012b, 76). 19 EIA (2013). 20 Bloomberg (2012); Lahn and Stevens (2011); Platts (2012). 21 Platts (2012). 22 JADWA Investment (2011, 21). It should be noted that the net effect (increased Saudi production) of these domestic consumption savings made may themselves push down prices, thereby reducing the opportunity cost range suggested by the Jadwa calculations. 23 See fn16. January 2014: A Roadmap for Renewable Energy in the Middle East and North Africa 5

12 render alternative energy options economic in fiscal terms, irrespective of their cost competitiveness on a consumer-price basis. At an import price for crude oil verging on $110/bl, even the more costintensive options of PV and CSP may reduce overall energy import costs, and hence the fiscal burden faced by governments. Jordan, for instance, which imports 96 per cent of its primary energy needs, had incurred an import cost for fossil fuels representing 20 per cent of its GDP by 2010, and only a little of this is recovered via final consumer prices for energy. 24 Jordan s external debt rises along with its trade deficit (driven also by growing energy import bills), the Kingdom having been forced to turn to the IMF for help with serving its external debt. 25 The economic and monetary value of both forms of cost (low regulated prices in NECs and energy subsidies by NICs) has to be paid for either way via budgetary allocations that could have been used elsewhere. 26 A recent OECD report on the MENA region captures this rising cost, arguing: Rising energy demand and heightened geopolitical risks associated with the recent events in the Middle East and North Africa (MENA) region will increase upward pressure on energy prices in the coming years With little policy emphasis on energy efficiency and an intensive use of fossil fuels, the countries in the MENA region will be particularly exposed to the negative consequences of rising energy prices in the longer term, especially the small oil producers and net oil importers. To embed sustainable, long-term economic growth in the MENA region, countries must diversify their energy sources Environmental costs Environmental costs are rarely taken into consideration when determining the price of different fuel types used within an economy, a truth also in MENA economies. In large part, this is because the eventual economic costs caused by gradual environmental degradation and pollution associated with heavy use of fossil fuels are hard to quantify, and are largely external to the pricing formation process of energy. Similarly, the environmental benefits associated with renewable energy sources, such as lessened local pollution and a more favourable carbon emissions balance, do not form part of the pricing mechanism of energy in MENA countries they hence accrue as positive externalities in the form of environmental benefit, and are not reflected in the price of different sources of energy. There are, nevertheless, good reasons for MENA economies to consider environmental externalities as part of the package of wider social benefits that renewables have to offer to the region. Far from being immune to the effects of pollution from fossil fuel-based energy generation, water desalination, and industry, many MENA countries are indeed directly exposed to the negative effects of heightened air pollution and water contamination. They will also be exposed to the effects of climate change such as rising median temperatures, lower precipitation, and sea level rise that fossil fuel-based emissions are believed to accelerate. 28 The fishery industry, historically important across the MENA region, is particularly vulnerable to climatic changes such as increasing desertification, and deteriorating coastal water quality and temperature. 29 While many middle-income countries in the Levant and North Africa, alongside other developing countries, argue that climate change mitigation must come second to more pressing poverty alleviation, the preservation of climatic conditions that 24 Energy Charter Secretariat (2010, 6). 25 Energy Charter Secretariat (2010, 6). 26 Fattouh and El-Katiri (2012a, 18). 27 OECD (2013, 9). 28 E.g. see Solomon et al. (2007); Luomi (2012). 29 The impact on human and animal life of fossil fuel-induced pollution and overall climate change is complex and is the subject of intense controversy over causalities. What remains unquestioned is the highly negative impact on human health which results from polluting activities that involve energy and industrial production based on burning fossil fuels, in particular oil. Human-induced environmental changes (such as rising temperatures on land) have very severe impacts on land availability and on its suitability for cultivation, by causing desertification, and less rainfall overall. Rising temperatures at sea, combined with additional environmental pollution (for instance, via artificial land reclamation), and overfishing, severely reduce biodiversity and impact fisheries, the lifeline for people across coastal MENA countries. January 2014: A Roadmap for Renewable Energy in the Middle East and North Africa 6

13 ensure sustained access to arable land and agriculture, and to fishing resources at sea, are important long-term goals that would render environmental considerations not so much of a luxury concern for these countries after all. 30 The MENA region s considerable reliance on oil and gas, as well as its associated focus on energyintensive industrialization projects that make further use of domestically produced hydrocarbons, has also left a mark on the region s carbon footprint, which has grown dramatically since the 1960s alongside rapid rates of urbanization, energy-intensive industrialization, and rising living standards (see Figures 4 and 5). Figure 4: Per Capita CO 2 Emissions by Region, 2009 Figure 5: Regional Trend in CO 2 Emissions Growth, * Source: World Bank (2013a). Notes: *Share for Eurasia for due to data limitations Source: World Bank (2013a). Concern for the negative impact of climate change has been voiced on various occasions by policymakers in the region. Arab heads of state signed the Damascus Declaration of 2007, stating their commitment: to take necessary measures and develop competent plans to enhance renewable energies in their countries energy portfolios. 31 Despite some variation between different technologies, renewable energy sources generally offer considerable environmental advantages vis-à-vis fossil fuels. The life-cycle CO 2 emissions of renewable energy are significantly lower than those of fossil fuels, rendering most renewables an environmentally friendlier option than many other energy alternatives. 32 Wind, solar, and hydro/waterbased energy technologies generate no emissions during operation, whilst biomass and geothermal energy generate significantly lower emissions than traditional fossil fuels. 33 El Fadel et al. show in a 30 Reddy extensively outlines the argument put forward by many developing countries against renewables as being an economic luxury that corresponds primarily to highly developed countries environmental protection agenda. Reddy (1991). For an assessment of MENA countries vulnerability to climatic change, see Solomon et al. (2007, ) (Europe and the Mediterranean, and Asia). 31 MENAREC 4 (2007). 32 IEA (2011a), 68; see also Cherubini et al. (2009); POST (2006). Some renewable energy sources, such as biomass, bioenergy such as waste-to-energy, and large hydro-projects come with their own environmental problems, the discussion of which would reach beyond the scope of this paper. Standard technologies such as solar and wind power, the most important options used in the MENA, come with a reasonably lower impact through emissions and overall environmental degradation than fossil fuels. 33 Environmentally, some technologies raise fewer concerns than others; both solar and wind technologies, for instance, involve little environmental controversy land use being one area of concern, particularly in highly populated areas. Offshore wind farms, hydro, geothermal, and biomass energy, by contrast, raise a number of environmental concerns, including marine January 2014: A Roadmap for Renewable Energy in the Middle East and North Africa 7

14 simulation the enormous emissions reduction potential of a sectoral introduction of renewable energy in the MENA region up until Many renewable energy technologies also impact the environment significantly less than alternatives, owing to their limited technical risk. The risk of environmental disaster in the case of technical fault or manmade error such as the contamination of air, land, or water is unequally smaller with wind, solar, or even biomass plants than in the cases of fossil fuel-based plants or of nuclear power the other energy supply alternative of several MENA economies. Such considerations also render renewable energy a technology that is socially compatible with many parts of the population in sharp contrast with the more polluting energy technologies such as coal or new oil-fired power plants, and nuclear energy, whose introduction faces significantly more social hurdles, and not just in the MENA region. The main concern around renewables is hence not about their acceptability, or the social benefit they may generate, but relates to their scale and economic feasibility. 3. Barriers to Renewables Deployment in the MENA Key to determining any technology s deployment is its comparative cost advantage vis-à-vis existing technologies. Renewables in this equation have always faced more difficulties than most other energy technologies, in the main because of the lengthy lifecycles required to recover their high initial capital costs, the absence of any meaningful way to consider externalities in the calculation of the full cost of renewable and non-renewable energy sources, and the additional cost of integrating intermittent energy sources into stable power systems. 35 At the same time, the MENA region is widely seen as one of the best locations for solar energy, with high-value wind locations in some MENA countries, suggesting that regional lifecycle costs for renewables could lie well below those in most other regional markets, such as Europe and North America. 36 So why have renewable energy sources not been taken up by MENA economies to a larger extent? The answer lies in the MENA region s particular energy market structures, most importantly in the way in which energy is priced domestically. Below, we discuss how existing regional energy pricing mechanisms impede a sensible cost comparison between renewable and conventional sources of energy in the MENA region, to the disadvantage of renewable energy Electricity pricing in the MENA region The political economy of energy in the Middle East and North Africa has always been characterized by a set of unique regional factors: - primarily, the availability of large supplies in conventional oil and gas resources; - the pivotal role played by hydrocarbon wealth in many MENA oil and gas producers economic development since the 1960s and 1970s; and environmental degradation (in the case of offshore wind), the environmental consequences of large hydro-installations in the form of flooding and impacts on existing water systems, and the polluting effects of geothermal energy production on air and water resources. DLR (2005, 163 8). 34 El Fadel et al. (2013). 35 Intermittent energy supplies are interrupted by the absence of the climatic or environmental condition on which its energy flow is based, for instance in the case of absent or variable wind strengths, and the absence of daylight and sunshine by night. Integrating intermittent energy supplies is often seen as a challenge if not in developed economies, then certainly in developing economies with weak power sectors. Technology itself is not so much the problem here as a lack of experience, as well as poor utility company funding (often in the presence of a state monopoly on the entire utility sector value chain), poorly maintained electricity grids, and (what is perceived to translate into) a lack of access to modern metering and smart grid technology. Nevertheless, technical solutions do exist, rendering the integration of intermittent renewable energy sources more an issue of cost than of technological feasibility. E.g. see EEA (2001, 52). 36 DLR (2005); OECD (2013); IRENA (2013b); Karakosta and Psarras (2013); Stambouli (2011); Vidican (2012); Razavi (2012); Pejat et al. (2013); Dehghan (2011); Kazem and Chaichan (2012); Al-Saleh et al. (2008); Saudi Arabia Solar Industry Association (2013). See also Appendix II. January 2014: A Roadmap for Renewable Energy in the Middle East and North Africa 8

15 - the particular social contract (resulting from the first two factors) in many MENA countries where energy has, for many decades, been considered something of a public good to be provided by governments, if not for free, then at prices that have in many cases been merely a fraction of their price in any other international market for most of these countries modern histories. The resulting pricing structures span across different fuel types and electricity, and involve explicit and implicit government transfers to producers of fossil fuels and utilities, importers, and distributers in addition to direct consumer subsidies. Electricity prices illustrate the MENA-wide policy of providing low-cost energy supplies to both households and industries (see Figure 6). 37 Kuwait s average residential electricity tariff of less than one US /kwh electricity stands out as the world s lowest electricity price, in place unchanged since the 1970s. Other GCC states Iraq, Syria, and Yemen, with prices below 2.5 US /kwh charged less than a quarter of the average electricity prices in liberalized markets such as Europe and North America in Average prices conceal the variation of price levels by consumption groups, which in some cases can lie significantly below those tariffs shown, for particular consumer groups. Figure 6: Cross-Country Comparison of Average Residential Electricity Prices in Selected MENA and non-mena Countries, 2008 Source: El-Katiri, Fattouh and Segal (2011); EIA (2013) Only Morocco and the Palestinian territories match European levels, thereby being exceptions to the otherwise low-cost environment for Middle Eastern electricity both countries are reliant on international imports of oil for power generation, and Morocco imports Spanish power, being unable to supply its own market (a fate it shares with many of its MENA neighbours). Nevertheless, both the Moroccan government and the Palestinian authorities subsidize electricity prices, suggesting that actual generation costs may well exceed these already high price levels rendering their domestic electricity generation exceptionally expensive even by international comparison. Using Levelized Cost of Energy (LCOE) estimates to compare price ranges for renewable and conventional energy alternatives, it appears relatively clear at first sight that any economic cost-saving potential for renewable energy is in fact difficult to demonstrate given these domestic electricity tariff ranges. 38 At an LCOE of between US 11 48/kWh for utility size installations and US 13.8/kWh for 37 We use 2008 data for the cross-comparison as the latest available international data from the EIA is only available for The Levelized Cost of Energy (LCOE) estimates the cost of energy sources based on their lifecycle costs, including: initial capital cost, factors such the fuel type s capacity factor, the cost of equity, the cost of debt, operating costs, and expected fuel costs for a given technology. It is widely used to compare the costs of different fuel technologies that may differ in terms of the size of the initial capital cost, the fuel cost, etc. The LCOE is an imperfect measure subject to various assumptions based on local conditions, but it provides us with the most practical way of making different technologies more comparable. Useful references for recent, more elaborate work on LCOE calculation methods and/or analysis include NEA/IEA/OECD (2005); January 2014: A Roadmap for Renewable Energy in the Middle East and North Africa 9

16 rooftop installations of typical solar PV models, and between US 6 14/kWh for onshore wind, the average LCOE for even lower-cost renewable energy technologies will exceed the domestic price for electricity across the vast majority of MENA countries. 39 A look at disaggregated data for residential, commercial, and industrial power use for 2012 nevertheless opens up some material for thought: prices for industrial and residential/commercial users differ significantly in many MENA countries, for varying reasons including cross-subsidies for residential and commercial users, or a simple tendency to shield industrial electricity prices less against rises in electricity generation costs than residential users (see Figure 7). 40 While still tame in some larger oil and gas producing countries, such as the GCC economies and Algeria, the size of these industrial tariffs could provide some economic opportunities for renewable energy technologies in industrial use or, conversely, allow for more generally adjusted electricity tariffs. In Morocco, for instance, (one of the MENA region s highest priced markets for electricity) average residential electricity tariffs stand at 11/kWh, but the price for commercial customers is more than three times as high, at 35/kWh, while industrial consumers pay a high 133/kWh. At these prices, even high-cost CSP technology could deliver a cost-effective electricity supply when this is compared with the high cost of Morocco s oil-fired power plants. This case could indeed be made for industrial users in most MENA countries, including Algeria, Egypt, Jordan, and several of the GCC economies. This data also offers an important indication of where electricity prices in the MENA region could be, if subsidies on direct electricity and on input fuels were transparently removed. Figure 7: Residential, Commercial, and Industrial Electricity Prices in Selected MENA Countries, 2012 Notes: Prices are averaged between (where applicable) dynamic night- and day-tariffs. Iran's highly fluctuating exchange rate makes a meaningful valuation of electricity prices in $ terms difficult. We have used an exchange rate of IR30,600:$1. Iranian electricity prices are as of UAE prices are based on Abu Dhabi in the Singh and Singh (2010); Zweibel (2010); Branker et al. (2011); Darling et al. (2011); Wang et al (2011); BNEF (2011). For a thorough discussion of the advantages and limitations to the concept, see Appendix I. 39 Solar estimates based on EIA, wind on IRENA estimates. CCC (2011, 22 3); IRENA (2012); See Appendix II for a costcomparison table. All reservations about the validity of LCOE estimates discussed above remain. 40 In some cases, industrial users may also cross-subsidize residential and commercial users. There is no publically available information on such practice other than case-based narratives. 41 We used the free market quotation for Iranian rials at end-october 2013, which differs significantly from the official exchange rate of Iran s Central Bank. Iran s highly devalued currency distorts this cost comparison, allowing only limited conclusions at this point of time. January 2014: A Roadmap for Renewable Energy in the Middle East and North Africa 10

17 absence of detailed price data for all seven emirates. Israel: average tariffs, excluding special (subsidised) tariffs applied to Palestinian Authority. Source: Arab Union of Electricity (2012); Tavanir; Israeli Public Utility Authority Domestic pricing of fossil fuels An important part of the wider picture of low electricity prices is hence the price of conventional fuels such as diesel, fuel oil, and crude oil. Crude oil is used by a number of oil producers to compensate for insufficient gas supplies during peak demand in summer, and natural gas is supplied to domestic industries such as power generation. As the mother-of-all subsidies, the MENA region as a whole continues to subsidize and under-price domestically supplied fossil fuels to an extent that will render alternative renewable energy sources uncompetitive on a cost basis even where genuine economic value would be generated, for instance via saved imports or the availability of more oil and natural gas for exports. Only in NICs can the size of the resulting energy subsidy (the difference between import cost and the price at which energy inputs are sold domestically) be determined; this is usually done by deducting the domestic price charged for energy imports from their import price. There are, however, many other forms of indirect subsidies concessionary loans, government guarantees, land grants, tax incentives, R&D spending, liability insurance, leases, land rights-of-way, waste disposal, and guarantees to mitigate project financing or fuel price risks and potential commercial losses made by public utility companies and carried over by quasi-fiscal transactions which cannot be reflected by such measures. 42 Conventional measures of subsidies are not able to capture the economic value lost by NECs (such as Saudi Arabia) for any given energy product be it crude oil, refined products, or natural gas that is lost to the international market and sold domestically at a fraction of its international market value. This poses a problem for the economics of energy, and the commercial valuation of energy resources in many MENA oil and gas producers. Unwilling to consider the opportunity cost (the cost associated with value lost for fossil fuel sources priced domestically below their economic value on international markets) as being a subsidy, many MENA producers refer to the long-run marginal cost of production per unit of energy as the relevant benchmark framework for evaluating the cost of domestically produced fossil fuels vis-à-vis renewable and other alternative sources of energy. 43 The subsequent paper-based cost comparison between both renewables and nuclear on the one hand, and regionally produced fossil fuels on the other is hence absurdly asymmetric, particularly in the case of crude oil and oil products. The value lost to NECs is in the form of: wasted energy, a more rapid depletion of these countries hydrocarbon resources, and consumer subsidies that benefit primarily large users of energy, and while not quantifiable in the conventional sense, it can only be thought of as being excessive. An example illustrates this dilemma. In 2012, Saudi Arabia s domestic price for electricity resulting from its assumed input costs (the long-run marginal cost of production per unit of energy), started at $0.013 per kilowatt hour for residential users and $0.036 per kilowatt hour for commercial users. However, the Saudi Electricity and Co-generation Regulatory Authority (ECRA) suggests that none of these tariffs is cost-reflective, irrespective of the already low costs for input fuels. 44 It is clear from these numbers that RES technologies such as solar (between US for PV and US 18 30/kWh for CSP) 45 and wind (US 5 16/kWh), 46 despite significant cost falls over the past few years, find it difficult to offer a commercially attractive option. A recent King Abdullah City for Atomic and Renewable Energy (K.A.CARE) study confirms that under current domestic cost assumptions for 42 Beck and Martinot (2004, 366). 43 E.g. Luciani (2010, 33 4); for a broader discussion, see IEA, OPEC, OECD and World Bank (2010). 44 JADWA Investment (2011, 21); El-Katiri (2011, 8, fn16). 45 Brown et al. (2011, 36); See also Appendix II. 46 REN21 (2011); See also Appendix II. Wind costs at the lower end would already be competitive on some higher-price electricity markets such as Morocco. January 2014: A Roadmap for Renewable Energy in the Middle East and North Africa 11

18 alternative oil and gas-fired power generation, neither renewables nor nuclear power offers any material cost savings. 47 Are alternative energies in Saudi Arabia hence uneconomic? The answer is highly sensitive to the underlying cost price assumptions made under current Saudi market conditions. Saudi Arabia, as one of the world s lowest-cost energy providers to its domestic market, supplies natural gas to domestic power producers at a mere $0.75/MMBtu, and oil at $2.7 $4.3/barrel ($0.47 $0.74/MMBtu). 48 The Saudi domestic industry price for crude oil and oil products lies significantly below international market prices the price Saudi oil would be able to fetch if exported rather than used domestically. A 2013 White Paper published by the Saudi Arabia Solar Industry Association makes this point, using static international prices to reflect the kind of opportunity cost Saudi Arabia encounters under its current domestic energy price model: On average 1.3 barrels of oil are required to generate one MWh of electricity 1.3 barrels worth 139 USD that cannot be sold on the world market. Thus, the opportunity cost for the usage of oil for electricity production is 139 USD per MWh, respectively USD per kwh. 49 While the precise level of opportunity cost is likely to be less straightforward than suggested in this calculation, it is clear that Saudi Arabia is incurring a cost albeit implicitly that is not reflected under current fuel prices and it hence influences domestic fuel pricing incentives negatively towards energy alternatives such as renewables. Indeed, assuming the above suggested kwh price of US$0.139, the comparable price of CSP in Saudi Arabia would come in (at $0.175/kWh) with a considerably lesser cost disadvantage than under current price assumptions all of this being based on very tentative assumptions, given the absence of official Saudi cost estimates to confirm these rule-of-thumb estimates. Saudi natural gas is similarly low-priced at $0.75/MMBtu, about five times less than the US Henry Hub average in 2013 and a mere a fraction of the projected cost of new, nonassociated gas development costs in Saudi Arabia s Empty Quarter and the Red Sea coastal offshore areas (with a cost range of US$3.50 $5.50/MMBtu). 50 Natural gas importers face very different cost profiles to start with, as the expected cost of new LNG imports may range rather above a conservative estimate of $10/MMBtu sufficient to render renewable energy projects viable in NICs with no own gas production. Kuwait s domestic gas price to industry ($2/MMBtu), for instance, already lies at the higher end of the MENA region s price spectrum, implying an explicit subsidy for imported gas supplied of above $8/MMBtu. The process of comparing the LCOE for renewables vis-à-vis natural gas in Kuwait would arguably need to include the expected long-run cost of gas including all import costs, in order to assess the net-benefit of each energy source, with solar probably offering cost benefits in view of the relatively high cost of LNG. The Emirates Solar Industry Association (ESIA), for instance, has shown that the LCOE from solar PV in typical MENA climates (estimated to be $0.15/kWh) makes PV cheaper on a simple LCOE basis than open-cycle peaking units at gas prices higher than $5.00/MMBtu. 51 This condition is likely to be fulfilled by all importers of LNG (though not pipeline gas) and by some of Saudi Arabia s higher-cost gas projects. Large natural gas exporters such as Qatar may also include factors other than the marginal cost of producing gas in their cost considerations including a cost provision to reflect the depletion of the country s valuable gas resources at a faster pace and the erosion of export capacity over time in a similar way to the process adopted by oil exporters. The economics of renewables versus oil differ substantially from those of renewables versus natural gas because of the far higher opportunity cost of oil and its high value as an export product. While the calculation of a static international shadow price for oil as a benchmark for domestic oil pricing is 47 Energy Intelligence Finance (2011). 48 ESIA (2012, 10); JADWA reports Saudi ECRA pays Saudi Aramco US$4.3/bbl for light crude and US$2.7/bbl for heavy crude, which JADWA believes reflect prices to other industrial users as well. JADWA Investment (2011, 21). 49 Saudi Arabia Solar Industry Association (2013, 7). 50 MEES (2013b). 51 Bazilian and Roques (2008, 10); ESIA (2012). January 2014: A Roadmap for Renewable Energy in the Middle East and North Africa 12

19 undoubtedly problematic, the moderate assumption of a domestic price of $60/bl in the above K.A.CARE report already demonstrates the viability of renewable power options falling short of some more drastic cost demonstrations made by other reports. A 2011 Bloomberg study similarly concludes that falling costs of PV technology mean that solar energy is already a viable option for power generation in the region when used to replace the burning of oil, as long as that oil is valued at the international selling price. Even under the report s low-price scenario of $80/bbl, solar PV plants are cost-competitive with oil-fired power generation. 52 The study concludes that Any assessment of the economics of PV in the GCC depends critically on whether the comparison is with the extraction cost of oil or surely more correctly its international market price. If extraction costs are used as the comparator, then PV is uneconomic and will remain so for the foreseeable future. 53 A 2012 ESIA study reaffirms these results, showing that, with oil prices at about $80/barrel, or natural gas prices above US$13/MMBtu, solar PV projects become commercially viable in the MENA s generation mix without the need for subsidies. Solar power under this model is cheaper than a conventional open-cycle unit at peak production with gas prices: above $5/MMBtu (equivalent to oil at around $30/barrel), but requires $17/MMBtu to be competitive with base-load combined-cycle power around current LNG prices. 54 The break-even prices under this model are expected to fall further, as solar power costs continue to drop. 55 The study concludes that: as imported fuel (gas or oil) prices increase, solar power will increasingly become a viable part of the [MENA region s] generation mix. 56 Other country studies support the argument that domestic energy subsidies unique both in scope and size in the MENA region have constituted an important stumbling block to the adoption of renewable energy both inside and outside the MENA. 57 An account from Egypt provides a picture of this problem a problem which ranges even beyond mere price comparisons to the dissemination of technology within the national energy market: In Egypt, and across the region, energy subsidies are the Achilles heel of the energy sector. Through their impact on energy prices, subsidies distort incentives for consumers (by reducing demand for clean energy, which costs more for individuals and commercial consumers) and for the private sector (by increasing investment costs for manufacturers of renewable energy parts and components, as well as for service providers, because of the limited and unpredictable market). Energy subsidies have also been shown to limit technology transfer of more than intellectual property rights such as patents for renewables Energy subsidies can thereby lock-in some technologies to the exclusion of others that are more promising, such as renewables Faced with an already overburdened budget, the financial incentives required for renewable energy deployment are perceived as unaffordable, thus preventing the formation of coalitions for change BNEF (2011). 53 BNEF (2011). 54 ESIA (2012, 8). 55 ESIA (2012, 14). 56 ESIA (2012, 8). 57 E.g. Vidican (2012); Razavi (2012); Patlitzianas et al. (2006); ESIA (2012), 10; Bazilian and Roques (2008, 9). 58 Vidican, G. (2012, 99). January 2014: A Roadmap for Renewable Energy in the Middle East and North Africa 13

20 4. Promoting Renewables in the MENA Region How can renewable energy be promoted more inclusively and, most importantly, efficiently within the MENA region s own economic context? We suggest several different routes, some of them complementary: (i) (ii) the economics of the first best: reforming regional energy pricing mechanisms, and bringing in the private sector, thereby addressing regional energy market distortions in the first place; and the economics of the second best: fiscal and regulatory incentives to reduce the cost disadvantage of renewables vis-à-vis fossil fuels in line with other, industrialized markets. Renewable energy and its commercial and wider social benefits may also be realized more effectively when it is: (iii) integrated within wider national energy strategies by specifically targeting those positive externalities that are not typically priced into the cost of renewables through the electricity tariff (as long as cautious policy ensures positive externalities are based on actual economic value generated) The economics of the first best: market incentives Creating the right incentives for renewable energy deployment in the MENA region can involve a toolkit of economic policies that reduce or eliminate market distortions that have kept renewables from entering the MENA market in the first place, in combination with the incentives that markets generally need: access to sources of finance and overall political support. The economic savings made by moving via this route can be substantial. The removal of distortions not only results in direct economic savings (via the reduction of energy subsidies, for instance) but also indirect savings through a reduction in deadweight loss (for instance through energy waste and unabated energy consumption growth where energy comes at a value close to zero to the individual user). The political difficulty is considerably larger than that associated with second-best economic policies. However, economic gains and a sensible national approach that ensures market incentives create tangible social and economic benefits for all citizens, could create a real opportunity for renewable energy to be part of a wider structural reform of domestic energy markets. Energy market liberalization (i): Reforming domestic energy prices Perhaps the most potent tool for MENA economies in the promotion of renewables is the reform of domestic energy pricing frameworks, in order to reflect the comparative economic value of each energy technology. Given the international price for both oil and natural gas, the high degree of fossil fuel-reliance by MENA economies, and the comparative locational advantages of renewable energy technologies (such as solar) in many MENA countries, the economic value of renewables could be apparent on a cost basis even without the dedicated policy tools and subsidies on renewable energy which are seen in Europe and North America. Using cost-reflective prices as principle indicators of market forces (the invisible hand ) rather than policy-induced targets and incentives also reduces the margin for the creation of new distortions and economic loss, helping markets absorb renewable energy where it will result in economic savings, while it prevents markets from wasting resources in cases where renewables won t generate value. Allowing this cost advantage to induce renewables investment would be a very effective and valuegenerating way of encouraging such investment, for the market would only pick up on renewables investments that are financially advantageous in comparison to the use of conventional energy sources. Little additional regulatory or financial capacity by the state would be needed, which renders domestic pricing reform in theory the most effective, and most developing country-friendly way of encouraging renewable energy uptake. In reality, the problematique of reforming domestic energy prices is large, both politically and economically, in developing economies even more than it is in highly industrialized countries. In some of the MENA region s middle income economies, the resultant January 2014: A Roadmap for Renewable Energy in the Middle East and North Africa 14